The bi-annual BHN Hotel Investment Survey completed in January, coupled with input from industry experts, suggests that European hotel investment activity in 2017 should look a lot like 2016 and will perhaps grow modestly. All things
considered, last year was a decent year for Europe, but there are some clouds on the horizon in terms of the implementation of Brexit and several important upcoming national elections.
The BHN survey posed a question about confidence in the volume of hotel investment opportunities in Europe in 2017 compared with 2016. Three-fourths of respondents were somewhat or very confident that the volume would be greater than it was in 2016. One in six respondents was very confident, while the majority (59%) were somewhat confident. These results are slightly more positive than when we posed the same question about the U.S. hotel investment outlook. For more in-depth insight on investment activity across Europe, we turned to our industry experts.
Economic outlook
Starting with the economic outlook, Tourism Economics’ David Goodger says: “Across Europe as a whole, economic trends look positive moving into 2017 with another year of robust, if unspectacular, economic growth expected, but including an upturn in manufacturing and trade. 2017 should also see a return to more ‘normal’ rates of inflation as the effect of oil price falling fades. This will erode some earning and consumer spending power to moderate growth. And with elections coming up in a number of major countries, political uncertainty means that some investment may be constrained and deferred to later years.”
Goodger adds, “The U.K. economic outlook will continue to be dominated by Brexit. Once Article 50 is triggered and negotiations with the EU begin, it is hoped that greater clarity on future relationships becomes evident. Nevertheless, continued uncertainty will weigh on investment, with further subdued growth seemingly ahead, while the sterling will remain near current low rates. As usual for the U.K. outlook, the consumer remains key to growth and the extent to which higher inflation erodes earning and spending power will determine the extent of any economic slowdown.”
Investment outlook
When asked about the outlook for the coming year, Cody Bradshaw of Starwood Capital Group, Theodor Kubak of Union Investment and Chris Martin of HVS Hodges Ward Elliott each suggest that there will be more buyers than sellers in 2017 and that this will be a key influencer for investment activity.
“Investor demand for lodging assets should continue to outstrip supply across the U.K./Europe in 2017,” Bradshaw comments. “International gateway cities and ‘safe haven’ markets such as the U.K. and Germany will continue to appeal to foreign capital and domestic low-yield buyers, putting continued pressure on cap rates in a low interest rate environment.”
Kubak adds, “Given the present capital markets with ample liquidity and low financing costs, there is still strong appetite by a wide variety of capital sources. Hotels are now widely regarded as an attractive alternative investment class. However, due to limited supply of quality products, Europe will be seeing fewer transactions.”
“Across Europe generally, we expect hotel investment volumes in 2017 to be pretty similar to 2016, with the key influencer being the number of investors that decide to sell in 2017,” Martin adds.
REGIONAL FOCUS
Europe is much too diverse to generalize, so BHN asked industry experts for their regional views for the year ahead. The outlook for 2017 is looking mostly positive, but keep an eye out for those clouds on the horizon. BHN will be reporting back on how the year unfolds at the Hotel Investment Conference Europe (Hot.E) in September.
Western Europe/United Kingdom
“The current low interest rate environment coupled with the weak pound will make the U.K. a particularly attractive place for investors in 2017,” says Rod Taylor of TGA Limited.
Focusing on the elephant in the room – Brexit – Dylan Burke of CBRE adds, “The pattern of current ownership and the U.K.’s position in the performance cycle point to an increase in activity in 2017 compared with 2016. Nevertheless, hotel investment will be again significantly shaped by Brexit in 2017.”
Camil Yazbek of Patron Capital Partners says, “Before Brexit, we felt that the U.K. was getting toppy. Because of Brexit, across all real estate asset classes we invest in, we have now increased our original 30% allocation to U.K. opportunities to 50%, with the balance in Europe.”
Northern Europe/Scandinavia:
“Several new institutional capital sources, not previously active in the segment, will look to increase their interest and allocation in hotel real estate,” says Christian Kielgast of Nordic Hotel Consulting.
Southern Europe/Spain, Portugal, Italy
“In my opinion, investment activity in Southern Europe will stay roughly the same, which actually is a very positive fact, since the political uncertainties (elections in France, Germany and Holland) in the market will continue to affect and delay investment decisions,” says Charles de Ros Wallace of Geskaria Real Estate Investments. “Investment activity is favorable in Spain and Portugal, while it is unfavorable in Italy until the banks start selling the hotel debt to international investors.”
Eastern Europe/Poland, Czech Republic, Hungary
“Europe is at the tip of the cycle and in some markets already declining,” Kubak says. “Hence, yields will not further contract and parts of the money will shift to markets that had been widely neglected, such as in secondary and tertiary traditional European markets and in Eastern Europe like Poland, the Czech Republic and Hungary.”
Contributed by Burba Hotel Network